1. Allete Jonathan A. Hill ACG2021 SECTION 008

2. Executive Summary Allete is returning to its core business (Energy). In the past 2 years Allete has been selling off its water businesses in Florida and is preparing to spin-off ADESA (Automotive services). Allete has been paying down its long-term debt. By paying down the debt, Allete is putting the shareholders interest above the creditors. Allete pays a 4% dividend. So even though the stock price has not risen, there is a steady income from the stock. By selling off its non-core business, the Board of Directors is trying to realize the value of the assets being sold for the investors. Allete is going back to what it does best, and will focus on its core business - Energy. The Board of Directors seem to have the Investors best interest in mind. Allete is returning to a pure-play Energy company. Annual report link: http://www.allete.com/corp/annualreport/2002AR.pdf

3. Part A. Introduction CEO David G. Gartzke Corporate Headquarters in Duluth MN Last Annual report was December 31, 2002 Supplies Energy in MN, and Automotive Services in North America. MN is main state for Energy Production, and Vehicle Services throughout North America.

4. Part A. Audit Report PricewaterhouseCoopers LLP is the Independent Auditors The Independent auditors stated that using generally accepted audit practices, that Allete has provided the information fairly. That the information contained was the responsibility of Allete’s Management.

5. Part A. Stock Market Information Allete’s stock $31.75 Twelve month trading range of the company’s stock was $18.86 to $33.92 Dividend per share $0.26 last quarter Above information is from 02/23/2004 Your opinion about the company stock as an investment? BUY

6. Part B. Industry Situation and Company Plans Allete has several lines of business. Allete started as Minnesota Power and expanded from there. Allete owned a lot of Florida’s independent water companies, but started selling the water companies in 2002. Allete started building ADESA, which is the automotive auction company throughout North America. ADESA has done so well, that the board of directors is spinning ADESA off onto it own.

7. The board of directors is trying to realize the shareholders value with the sale of the water companies and the spin-off of ADESA. Allete’s Future plans include: The spin-off of ADESA (Automotive Services), finish the sale of the water companies in FL, and to focus on its core services. This is from the annual report, www.fool.com, www.hoovers.com, biz.yahoo.com http://finance.yahoo.com/q/h?s=ALE http://www.hoovers.com/free/search/simple/xmillion/allete/--ID__11004--/free-co-factsheet.xhtml

8. Part C. Income Statement The format is most like a multistep. As seen below, the dollar amount has decreased from 2001 to 2002. This is because of the sale of assets and operations.

9. Part C. Balance Sheet 2002 shows a decrease in Assets and Liabilities. This is due to the sale of assets and paying off of the liabilities. This has increased Shareholder equity, which is what the board of directors wanted to do. The liabilities decreased the most.

10. Part C. Statement of Cash Flows Cash flows from operations were more than net income for the past two years. The company is shrinking by selling off the parts that are not as profitable and focusing on its core business. The company has sold off property, plant and equipment in the water business, and is spinning off its automotive business. The company's primary source of income will be from the Energy business. The companies primary financing is from Long-term debt. Overall, cash has increased over the past two years?

11. Part D. Accounting Policies The significant accounting policies: –Uncollectibles and allowance for Doubtful Accounts –Impairment of Goodwill and Long-lived assets –Pension and postretirement Health and Life Actuarial Assumptions –Valuation of Investments The topics of the notes to the financial statements: –Business Segments –Operations and Significant Accounting Policy –Goodwill and other Intangibles –Acquisitions –Financial Instruments –Investment in ACE –Jointly owned Electric Facility –Regulatory Matters –Discontinued Operations –Long-term Debt –Short-term borrowings and Compensating Balances

12. The topics of the notes to the financial statements: (Cont.) –Preferred Stock –Commitments, Guarantees, and Contingencies –Mandatory Redeemable Preferred Securities of Subsidiary –Common Stock and Earnings Per Share –Income Tax Expense –Other comprehensive income –Pension and other postretirement benefit plans –Employee stock and incentive plan –Quarterly financial data

13. Part E. Financial Analysis Liquidity Ratios Working Capital –2002 - (79.8 Million) –2001 - 191 Million Current Ratio –2002 -.89 –2001 - 1.27 Receivable turnover –2002 - 3.41 –2001 - 3.05 Average days’ sales uncollected –2002 -.009 –2001 -.008 Inventory turnover –2002 - 6.5 –2001 - 7.3 Average days’ inventory on hand –2002 -.018 –2001 -.02 2002 showed a large decrease in working capital. The current ratio dropped below 1. This can be contributed to the cash and trading securities decrease from 2001 to 2002. During this time the company paid down long-term debt. The rest of the numbers remained about the same. This shows that Average days sales is less than 1%. Allete’s power and automotive services do not require much inventory, therefore there is very little on hand.

14. Part E. Financial Analysis Profitability Ratios Profit margin –2002 -.09 –2001 -.09 Asset turnover –2002 - 46.9% –2001 - 49.2% Return on assets –2002 - 4.3% –2001 - 4.5% Return on equity –2002 - 11.4% –2001 - 13.3% The profit margin remained the same. The asset turnover dropped slightly. Return on assets dropped slightly. Return on equity dropped some. This shows that with Allete selling of assets/companies, Allete is still keeping their profit margin, and has had a slight dip on returns for what is left of the assets and equity. This information along with the cost of selling the assets/companies should explain the decrease.

15. Part E. Financial Analysis Solvency Ratio Debt to equity 2002 - 1.49 Debt to equity 2001 - 1.80 The drop in the debt to equity shows that Allete is paying off its debts. The long-term debt has been reduced, by paying cash and selling assets for more than what they are worth.

16. Part E. Financial Analysis Market Strength Ratios P/E 2002 - 13.5 P/E 2001 - 13.9 Dividend yield 2002 - 4.9% Dividend yield 2001 - 4.2% The P/E has remained about the same. The dividend yield has increased slightly. The change in P/E and dividend yield can be contributed to a low closing price on the stock. The stock closed in the low range compared to the year before. The stock price might show the result of the sale of the water systems in Florida.